Don’t obsess about GDP measures

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An American, a Frenchman and a physicist were talking about some unusual weather. “It was twice as hot this afternoon as this morning”, said the American, “the temperature went up from 40 to 80 degrees.” The Frenchman interjected: “That’s in Fahrenheit. In Celsius, it was six times hotter.” The physicist was scornful. “On the only really scientific measure, the Kelvin scale, the increase was a piffling 5 percent.”

Who’s right? Well, all the measures are accurate and it certainly was hotter. But no single ratio – whether twice, six times or 5 percent – captures just how much hotter it actually felt. The feeling of hotness, like the feelings of pain or anger, cannot be measured with genuine precision.

It is the same for the feeling of prosperity – any measure will be arbitrary and quite possibly misleading. Consider gross domestic product, the most common index of economic success. GDP is the sum of spending on everything in the economy, from shoes to shoe-shines, from cars to child care. In comparing countries with each other or over time, GDP is usually adjusted for inflation to calculate what is ambitiously called “real GDP”. It is then often divided by the population, creating “real GDP per person”. This is usually measured in “constant dollars” and, for 2011 in the United States, becomes $43,149 of 2005 dollars.

Economists recognise that GDP is far from perfect. In 2009, a French government commission suggested that it should be augmented by measures of the distribution of wealth, environmental sustainability and “quality of life”. The Human Development Index, which is widely used by the United Nations, combines GDP with life expectancy and years of schooling.

These modifications are welcome, but they fail to correct GDP’s main weakness – that is what might be called the fallacy of precision. The human meaning of prosperity simply cannot be reduced to numbers. Supposedly exact measures generally confuse more than they illuminate.

My rejection of quantification is anathema to most economists, who fancy themselves to be hard scientists. It also goes against utilitarianism, economists’ favourite philosophy, which claims all decisions can be reduced to numerical comparisons.

But consider an example: real GDP per person in the United States is up 103 percent since 1971. That sounds basically right: overall, Americans are substantially richer than they were four decades ago. The improvements include a 12 percent increase in life expectancy at birth, the shift from clunky black-and-white to sleek colour television and the introduction of the Internet into more than 70 percent of households. The gains far outweigh the losses, such as a 26 percent fall in the number of highway miles per resident.

The exact number, though, is a fiction. There is no way to assign a weight to each of the gains and losses, and no reason to assume that GDP, which measures the inflation-adjusted price of the various goods and services, is a particularly meaningful summation.

Happiness economists try to dodge the problem by looking for a measurable and meaningful number in people’s feelings. They claim subjective satisfaction can be counted up, simply by asking people to rate their happiness on a scale of, say, 1 to 5. The approach has many problems, one of which is that it doesn’t make any sense to say happiness has increased by, say, 12 percent.

Emotions just don’t work that way. George may love his current girlfriend more than his ex, but it’s only a figure of speech to say he loves her twice as much. Similarly, it makes no sense to say we are twice as happy as our parents or 12 percent happier than we were a half a decade ago.

GDP and similar measures can be quite helpful rough indicators, especially for poor countries. For example, the Chinese government aims at 8 percent annual real GDP increase – that rate creates jobs without putting excessive strain on society. But the authorities in Beijing should be careful, for the precision is spurious. Sometime soon, the right GDP growth number will be lower. And when China gets rich enough, no measure of wealth will provide much insight.

Look at the International Monetary Fund’s calculation that GDP per person was 27 percent lower in France than in the United States in 2011. The exactitude is ridiculous and the basic conclusion, that Americans are substantially richer than French people, is silly. The countries are both rich and modern, just in somewhat different, incommensurate ways. France has cheaper medical care, longer holidays and better mass transit and bakeries. The United States has bigger houses and more cars per person.

Numbers are seductive, so economists, politicians and pundits tend to fret over every tenth of a percentage point of GDP. But it is easy to exaggerate the importance of incremental changes in measures of this sort. It would be better to stop striving for precision. Or at least to cut back by 92.4 percent.

Excellent analysis. Any comparison of anything is affected by the one’s culture, expectations (what we each believe “normal” in our particular society) and aspirations; the latter varying with one’s age and education.

Americans, on a fundamental level, desire to each be economically self-sufficient. The European “model” tends to prefer “cradle to grave” government intervention, early retirement and long vacations. The difference has explained the historic higher “productivity of Americans. We will work harder to have “more”.

None of us would choose to die alone and broke, although many do. Most of us want some control over how some of our “income” is spent and what for.

The “jury is still out” as to whether any “advanced society” can afford the medical interventions that are rapidly becoming possible. The cost of possible medical care is as unlimited as is our individual thirst for life. Our individual income does not expand nearly so fast, either in recent years nor, I predict, in the future.

This “disconnect” between our “need” and what we can afford will continue to be a defining issue of our time.

Bravo! Finally a man who can think for himself instead of letting the ‘accountants’ think for him. The world is richer than it ever was and people are getting unhappier and unhappier. Funny thing, that when I was young, my grandmother used to tell me “money can’t buy happiness”, nowadays people don’t say that anymore. There is a belief that money IS happines. Our thinking has become rotten and diseased.

Another concept is that the GNP does not reflect well being of the citizens. You can have a country selling billions of cigarettes and then spend billions on cancer research, all the while reflecting a growing economy. This scenario illustrates the absurdity of using the GNP for an indication of real growth.

The USA is the penultimate consumer and disposable society. It moves more often. It travels with disposable vehicles far more frequently and for far greater distances. It builds less substantially and it tends to use up the goods and services it buys more rapidly than older ways of life and most other countries. Of course it has a larger GDP than almost any place on earth. It designed itself and it’s population to do just that.

However, it appears that the joy ride and consumption and building boom have hit a snag. All those transactions for fairly flimsily constructed homes and business premises, millions of vehicles and related products and services, and the flood of products uses by all activities, make for large GDP figures, large employment figures, a booming economy of money making money on money but it also makes for a very flimsy and transient definition of wealth and an enormous appetite for the world’s resources. One could almost say it is an economy that very nearly eats its own tail and that also implies it eats its own excrement as well. And it produces mighty jakes that could gag an elephant and certainly are getting harder to bury.

For the past few years the UN has been talking about sustainable growth. The American way of life is not one that can be exported well without enormous disruption to older societies and it tends to leave an ever-growing mountain of garbage in its wake. It also seems to require constant debt to maintain itself. But older societies have a difficult time making money supply grow and tend to live with longer lasting environments, even if they may become squalid from lack of maintenance, the poverty of the residents and population pressure. And they do not have the room for nor can the planet sustain consumption and waste at American scales.

The world cannot live like sharks that must constantly swim to eat and stay alive. We are not the great Satan (no one has a monopoly on him) but it might be the Great Insatiable.

BTW – not penultimate but “ultimate”. But until the ME and the Chinese start tearing down their second growth of urban infrastructure and start moving like Atilla’s Huns, this country is still king of consumption and will have a gigantic GDP. It wrote the books on consumption, transcribed them to an ever changing variety of electronic formats, made all the older types obsolete and finally even burned the books. And a lot of the old gadgets are being recycled in Africa and the shipping cartons get sent back to China on the empty vessels they came in, to made a fortune for a very clever Housewife.

Another BTW – Louis XIV used to eat gigantic meals and had a bay window bigger than a Beacon Hill townhouse. But he had good legs and was otherwise in good physical condition.

Everything that went into him and everything that came out was treated like it was a sacrament and given ritual respect. The rituals of Versailles – or at least the props and ornaments – even spread to other courts in other kingdoms but not nearly as obsessively. I don’t think the potty part was popular.

It makes me think the court knew something about economics before almost anyone knew anything about the subject.

Author Profile

Edward Hadas writes about macroeconomics, markets and metals for Reuters Breakingviews. Before becoming a journalist, he worked for 20 years as an equity analyst in Europe and the US. His book, "Human Good, Economic Evils: A Moral Approach to the Dismal Science" is published by ISI Books in Wilmington, Delaware. He has also written a course-book about political philosophy for the Maryvale Institute in Birmingham. Edward has degrees from Columbia University, Wadham College, Oxford and the State University of New York at Binghamton. He has a website, edwardhadas.com.